Question

Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $125,500. The freight and installation costs for the equipment are $1,600. If purchased, annual repairs and maintenance are estimated to be $2,500 per year over the five-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $30,000 per year for five years, with no additional costs. Prepare a differential analysis dated December 3 to determine whether Sloan should lease (Alternative 1) or purchase (Alternative 2) the equipment.

Answer 1

Answer: Picking Alternative 2 ( Purchase ) saves Sloan Corporation $10,400.

Step-by-step explanation:

In calculating the differential analysis I will go entry by entry.

Purchase Price Differential Effect on Income

= Alternative 1 (lease) - Alternative 2 (purchase)

= $0 - $125,500

= -$125,500

Income will be less by $125,000 because of alternative 2

Freight and Installation Differential Effect on Income

= Alternative 1 (lease) - Alternative 2 (purchase)

= $0 - 1,600

= -$1,600

Income will be less by $1,600 from alternative 2

Annual repairs and maintenance Differential Effect on Income

= Alternative 1 (lease) - Alternative 2 (purchase)

= $0 - (2,500 * 5)

= -$12,500

Income will be less by $12,500 from alternative 2

Lease

= Alternative 1 (lease) - Alternative 2 (purchase)

= (30,000 * 5) - $0

= $150,000 - 0

= $150,000

Income will be less by $150,000 as a result of leasing ( alternative 1)

Effect on Income as a result of Alternative 2 will be,

= 125,500 + 1,600 + 12,500

= $139,100

If Alternative 2 is picked then income will reduce by $139,600.

If Alternative 1 is picked then income will reduce by $150,000

= 150,000 - 139,600

= $10,400

Picking Alternative 2 ( Purchase ) saves Sloan Corporation $10,400.